Tesla Motors Inc. faces a potential delay in its acquisition of SolarCity Corp. from four shareholder lawsuits, creating added urgency as both companies use up cash.
The suits by four different shareholders, outlined in a regulatory filing Monday, all allege that Tesla’s executives and board breached their fiduciary duty by entering into the pact because Chairman Elon Musk and other Tesla insiders hold shares in both companies. One plaintiff seeks an injunction to stop the transaction, potentially holding up a deal until a hearing on Oct. 18 at the earliest. The cases are without merit, Tesla (IW 500/227) said in the filing.
While shareholder litigation doesn’t always hold up deals, any delay could be troublesome for both companies: Tesla plans to raise cash later this year both to pay for development of electric cars and to fund the merged company’s operations, and SolarCity disclosed after its second-quarter earnings that it was getting close to defaulting on its existing debt.
“We believe there is a bit more urgency for the Tesla-SolarCity deal to go through sooner so that SolarCity can get the access to capital that it needs," Barclays analyst Brian Johnson wrote in an Aug. 31 research note. Both companies will need more money given their cash burn and because neither one is profitable, wrote Johnson, who had also said that shareholder votes were possible by early to mid-October.
In this year’s first half, SolarCity used $1.3 billion in cash for operations and investing in its business, about twice what Tesla spent. The combined company will have about $5.2 billion in debt, according to pro forma financial statements in the regulatory filings.
The lawsuits were filed by the City of Riviera Beach Pension Fund, Arkansas Teacher Retirement System, and individual shareholders P. Evan Stephens and Ellen Prasinos. They seek to force Tesla to rescind the merger proposal and pay damages to the shareholders, and one seeks to establish a class action against Tesla.
According to the filing, the Delaware Chancery Court set a schedule on Sept. 16 to consolidate the actions and determine a leadership structure for the plaintiffs.
In court documents, Tesla argued that there is no need to hold up the deal because the plaintiffs could seek damages from the merged company later. The plaintiff in the Prasinos case countered that shareholders would sustain irreparable harm if the deal goes through as planned in the fourth quarter and asked the judge to expedite the case.
The merger proposal initially met resistance in part because Musk owns more than 20% of both companies and his cousins Lyndon Rive and Peter Rive are SolarCity’s chief executive officer and chief technical officer, respectively. Tesla shares, which had fallen 10% percent the first trading day after the deal was proposed, rose 1.1% to $207.58 at 10:19 a.m. in New York.
SolarCity announced a week ago that it raised $305 million through two deals. The first was selling future cash flows from SolarCity developments to Quantum Strategic Partners Ltd., a fund advised by the billionaire George Soros; the second was an 18-year-loan from a syndicate of five lenders.
By David Welch